I paid a contractor (more than $600) through Paypal. Do I need to send them a 1099-MISC?

[Irene2805]

You can take the fees related to the payments to the contractor as a business expense on your business return (Schedule C).  They are not included on the 1099-K issued by PayPal.

@CarterBear

[Jennifer_McCarroll]

Is the original (best) answer to the original question still true now in April 2021? (It was posted in 2019) i.e. that I do not have to submit a 1099-MISC and that PayPal will submit a 1099-K as needed?

[KristinaK]

Yes, the answer by PatriciaV is still valid. 

[NumbersNumbers]

I find it hard to believe the IRS would allow a $20,000 loophole:  

—i.e. that a service provider could be paid $19,999 via PayPal and not get a 1099-NEC or a 1099K!

I confirmed today via Message from within my client’s PayPal account that PayPal does not issue a 1099K unless the recipient received $20,000 or 200 transactions.

https://www.paypal.com/us/smarthelp/article/will-paypal-report-my-business-sales-to-the-irs-faq729

So what is the authoritative link/reference/website saying that if my client’s business paid for business services > $600 they do NOT need to issue a 1099-NEC to their independent contractor just because payment was issued through PayPal?  

No less than 5 of us CPA’s have been on the phone and emailing today discussing this question.

[AmyC]

You must send the form if you meet the requirements.

Begin with the IRS, Instructions for Forms 1099-MISC and 1099-NEC, Miscellaneous Income and Nonemployee Compensation,

This takes us to Box 1 on page 10 which states:

What is NEC? If the following four conditions are met, you must generally report a payment as NEC.

• You made the payment to someone who is not your employee.

• You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).

• You made the payment to an individual, partnership, estate, or, in some cases, a corporation.

• You made payments to the payee of at least $600 during the year. 

@NumbersNumbers

[NumbersNumbers]

@AmyC , I don’t think that you saw that this entire thread pertained to the question of payments issued via PayPal, so your answer could be misleading for a lot of people.

I read more after I put up that post and it sounds like a $20,000 tax loophole HAS in fact existed for PayPal payments for about a decade, although it goes away this year, 2022.  

I still cannot find authoritative guidance that issuing payments THROUGH PAYPAL gets you off the hook for issuing a 1099-NEC but everyone seems to agree that it does.

So, in the context of this thread, I believe your answer might be wrong, don’t you think?  In other words:  the right answer is apparently:

You do not issue a 1099-NEC to vendors who you paid through PayPal, for the year ending 12/31/21 because of the Big Loophole.  

Even though no one can cite a definitive source for this direction.

[NumbersNumbers]

Here’s a good article I found on The Loophole:

https://bradfordtaxinstitute.com/Content/Congress-Closes-the-Pa[product key removed]ting-Loophole.as...

[AmyC]

I did not see the thread and your link won't open; but, I went to the IRS Tax Forum. The IRS was very clear at the Tax Forum that the 1099-NEC stands alone. In fact, there were scenarios where the 1099-k was disregarded. I  believe the IRS expects you to follow the 1099-NEC rules. I would rather send a form than find out later that I should have and pay the penalties.

@NumbersNumbers

[NumbersNumbers]

@AmyC ,

It would be worth your time to read the entire thread because another expert, @PatriciaV , earlier in the thread disagrees with your conclusion.

I’m sorry that the link would not open for you but if you Google “PayPal Tax Loophole,” you will find several good articles (Bradford and Bloomberg) and they all indicate that if payments are made via PayPal no 1099-NEC needs to be issued to the recipient.

—I think that is ABSURD so in theory I agree with you, but apparently that has been the law up until 1/1/22, and apparently it has been a well-known loophole.

The articles indicate that the recipient who has received > $20,000  could end up “double-reported” to the IRS if the payer issues a 1099-NEC form and PayPal also issues a 1099K.

However, my client issued 1099-NEC forms last year (for 2020) even though he paid all of his vendors via PayPal and I have confirmed with one of his vendors that they did NOT also receive a 1099K from PayPal in 2020 even though they did receive > $20k.  

Definitely need to read the entire thread though for context.

[AmyC]

Ha! Yes, the first page of the thread discusses the old 1099-MISC rules, which were correct. Lots of 2019 comments! The IRS jumped ship to the NEC to close some loopholes and then made a big deal out of the $20,000 loophole being shutdown. The number of transactions will no longer matter either. In addition, many states already have the legislation in effect for 2021.

The 1099-K laws changed during the year. I understand that this is a time of big change and upheaval. I can see where the old wording looks good through the end of the year. I can agree that many will follow those rules.  If you look at how the thread began, 1099-misc instructions were clear and you could skip the 1099-MISC. However, when I focus on just the NEC wording of today, I believe the IRS should come back and say it was required. The 1099-NEC form, payer's section, says to go online and get the latest rules before filing.  For now, if you go to the IRS small business center, select operating a business, you will come to: Paying Independent Contractors
 

I imagine only cases that end up in Tax Court will matter. I think many people are not aware of the state changes. It will be interesting. I am glad you are aware and concerned.

But back to you, yes, there has been a huge loophole for a long time and it was crazy! You also mentioned that you did the 1099-NEC last year as well. So, I think you are on the side of better safe than sorry. We will keep a weathered eye on the matter!

[Jennifer_McCarroll]

@AmyC

I reopened this discussion last year and didn't send 1099s to my independent contractors (VAs) as I paid them via PayPal. But after reading through the responses the last day or two, I'm confused.

I checked out https://www.irs.gov/instructions/i1099msc and saw this:

Form 1099-K.

Payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC. See the separate Instructions for Form 1099-K.

And then this (from https://www.irs.gov/businesses/understanding-your-form-1099-k:(

Form 1099-K, Payment Card and Third-Party Network Transactions, is an IRS information return used to report certain payment transactions to improve voluntary tax compliance. You should receive Form 1099-K by January 31st if, in the prior calendar year, you received payments:

• From payment card transactions (e.g., debit, credit, or stored-value cards), and/or
• In settlement of third-party payment network transactions above the minimum reporting thresholds as follows:
  • For returns for calendar years prior to 2022:
    • Gross payments that exceed $20,000, AND
    • More than 200 such transactions

So do I need to send out 1099s to be on the safe side or can I avoid it?

(One of my VAs no longer works for me and I haven't been able to contact her since her daughter got very sick.)

Also, where does Zelle stand in all of this? I pay one of my VAs via Zelle. She is an American living in France and pays French taxes. She said she doesn't need me to send anything. But do I for my own safety?

Thanks,

[NumbersNumbers]

@Jennifer_McCarroll ,

You are correct.  The overall substance of @AmyC 's response is wrong.  However, see below for an interesting and messy nuance, and a couple of follow-ups:

1.  @AmyC assumed in her reply to me that I issued the 1099-NEC forms for my client last year (i.e., 2020's 1099-NECs) but I did not work for this client at that time.  The client issued the forms.

2.  @AmyC said, "I would rather send a form than find out later that I should have and pay the penalties."

But you don't send a tax form "just in case."  You send a form because the law says to do so.  The law does not say to do so, as you correctly concluded, when it comes to third-party payment network transactions.

3.  The references you cite above are authoritative, correct and relevant.  You did us all a great service to put up your post.  Thank you!

4.  HOWEVER, here is the one messy, confusing nuance:

Although the other 4 CPAs who I was talking to about this all agree that the prior year posts were correct and @AmyC's post is misleading, the nuance is:

After further research, I found that PayPal's site distinguishes each payment as either "Friends and Family," or as "Goods and Services," which I confirmed with the client.   [I don't use PayPal].  

Apparently -at least as far as we can figure out - PayPal only issues 1099Ks for Goods and Services payments not for Friends and Family payments.

This makes sense if you think about a friend reimbursing another friend for a theater ticket through PayPal:  that should be Friends & Family and obviously would not be subject to tax reporting anywhere.

THEREFORE, we are going ahead and issuing 1099-NEC forms for my client for the year 2021 because the payments were not flagged properly as "Goods and Services."   So we concluded this is the correct thing to do in substance because....

I confirmed with a vendor from 2020 who was paid > $20,000 in 2020  [$20k = the PayPal threshold up until 2022 when it drops to $600] that the vendor did NOT receive a 1099K from PayPal for 2020 even though the vendor was over the threshold. 

We think the vendor did not receive a 1099K because of how the payments were accidentally flagged.  But the vendor DID receive the 1099-NEC for 2020, so all was well, even though the letter of the law as you properly cited above, was not followed.

Therefore, we ARE issuing 1099-NEC forms to the vendors again for 2021 because we know that the income will NOT be duplicated in reporting to the IRS.  That is the key!  You can't issue a 1099-NEC to vendors if PayPal is also going to issue a 1099-K because the vendor will show up with too much income in the IRS records.

From PayPal's site:

If you’re sending a payment, payment types include:

• Sending to a friend and family - used when sending money or a gift card to a friend or family member. Before you complete a payment, you can opt to pay the fee, or pass it onto the recipient by changing it to a Goods or Services payment, to be covered by PayPal Purchase Protection.
• Paying for goods or service - used when buying an item or service from someone. When you make a purchase, the seller pays a small fee to receive your money. Your payment is covered by our protection policy automatically.

[NumbersNumbers]

This is a good article from Bloomberg:

“ It is important to note that transactions for personal gifts, charitable contributions, and reimbursements are specifically excluded from Form 1099-K reporting. Most TPSOs will likely attempt to identify such transactions based on their user agreements, which generally specify whether the user will be using the website for personal or commercial transactions. So, while a pool maintenance company that receives payments for its services through a cash app may receive Forms 1099-K in the future, friends sending money to reimburse one of them for theater tickets purchased for a group should not. This is because the pool company should have a commercial agreement while the friends should use personal agreements when signing up for the app.”

https://news.bloombergtax.com/tax-insights-and-commentary/new-form-1099-reporting-coming-in-2022

[HelloAAA]

I have done some research on this. it's so confusing and you should confirm with your CPA first but I hope this helps clarify:

1) as of 2022 the trigger for Paypal (or any 3rd party payer) to send a 1099k is reduced to $600.

2) if you pay with "friends and family" option you are required to send the contractor a 1099NEC. In other words, Paypal will not send them a 1099k if you use the "friends and family" option. PayPal will only include payments that are marked as "business" payments and those payments are always charged a fee (usually 3.49% + fixed fee of around 0.49 USD).

Venmo is also a 3rd party payment processor - they also ask for each payment if it's to "friends" (like a repayment of borrowed money) or for a business. I think this is only an option if you have business payments enabled for your account. The fee is lower: 1.9%+$0.10.

I think all credit card payments and services like Wise or Square don't have free options so all those payments will be reported on a 1099k.

Zelle is always free so banks are not going to ever send the 1099k.